Property Investors - One of the first questions you may have asked yourself is ‘is it worth it?'

Posted by Together on 6th December 2019 -

As a property investor – or potential investor - one of the first questions you may have asked yourself is ‘is it worth it?’.

You need to know how much you’ll get back, based on what you’re having to put in. And this quick guide can help you decide what rent to set, and how to calculate your return on investment.

Consider your costs

When thinking about setting your rent, take into account your outgoing costs relating to the property. These are likely to include any mortgage repayments, your lettings agent’s management fees, and regular maintenance, plus some less predictable one-offs.

If you’re in the process of buying a property, you may find it easier to obtain borrowing if the projected rent comfortably outweighs the cost of your mortgage repayments. At Together, we use a special ratio calculator which means, in some circumstances, that we don’t need to conduct a full affordability assessment.

Whether this applies to you will depend on your personal circumstances, so we can talk you through this at the time you make an application.

Check the local market

Of course, the going rate will play a large role in dictating what the rent is set at. A local lettings agent can give you a strong indication of what the property will likely let for on the open market.

They can also tell you if tenants are spoiled for choice by oversupply, which can suppress prices, or if demand is keeping the market buoyant. Based on this, you may want to alter the price slightly.

A bird in the hand…

If you already have a reliable and trouble-free tenant, consider your options before conducting a rent review – even if the market has risen. Your tenant might decide to walk away if you increase the rent too sharply, and your new tenant may not be so low-maintenance.

Is the potential extra income worth the potential added hassle?

Consider making improvements

Tenants may be increasingly discerning, demanding ever-more home comforts in exchange for their rising rent payments.

A few relatively inexpensive upgrades to your property could bump up the rental payments, although a lettings agent can confirm the local ceiling price – it may not be worth it. If it is, the outlay can often be recovered quickly, and provide long-term increased income.

Calculating your annual yield

‘Yield’ is simply another way of expressing the return on your investment. The larger the yield, the harder your investment is working for you.

Rental yields are easy to calculate. You simply take your annual rental income, and divide it by your initial outlay (i.e. the purchase price + any renovation/furnishing costs you incur before renting).

So, if you buy a buy-to-let flat for £78,000, then spend £11,000 getting it ready to rent, and rent it out at £600 per month:

• £78,000 + £11,000 = £89,000.
• £600 x 12 = £7,200.
• £7,200 / £89,000 = 0.0809.

Or, in other words, an 8.09% annual yield.

This calculation is based on the assumption that you’ve rented it out for a full 12 months. Remember to make deductions if you’re renting it out on a shorter-term basis, or it sits empty for a while between tenancies.

Let’s look at a short-term let:

You buy a city centre apartment worth £115,000, but it requires no renovations – just furnishing. It costs £3,000 to do this. You rent it out for £72 a night (after Airbnb takes their cut), but it only rents for 177 nights this year:

• £115,000 + £3,000 = £118,000.
• £72 x 177 = £12,734.
• £12,734 / £118,000 = 0.1079.

Or a 10.79% annual yield.

If you’ve not yet bought your property, you can calculate your potential yield by using a few ‘guesstimates’. Factor in your purchase price, your projected rental income, and imagine you’ve spent your full renovation budget (including contingencies) on preparing it for rent.

This will give you a ‘worst case scenario’ yield projection.

Calculating capital gains yields

A second kind of yield you’ll see is the increase in the value of the property.

To do this, you deduct your original outlay from the current market value, and divide the result by the number of years you’ve owned it.

For instance:

You bought a house eight years ago for £77,000, and spent £14,000 doing it up. It’s now worth £135,000.

• £77,000 + £14,000 = £91,000.
• £135,000 - £91,000 = £44,000.
• £44,000 / 8 = £5,500.

This £5,500 figure is the annual capital gains yield.

Articles on our website are designed to be useful for our customers, and potential customers. A variety of different topics are covered, touching on legal, taxation, financial, and practical issues. However, we offer no warranty or assurance that the content is accurate in all respects, and you should not therefore act in reliance on any of the information presented here. We would always recommend that you consult with qualified professionals with specific knowledge of your circumstances before proceeding (for example: a solicitor, surveyor or accountant, as the case may be).